GARDEN LEAVE IS NOT PROHIBITED UNDER THE PHILIPPINE LABOR LAWS

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Garden leave is the practice of the employer directing an employee not to attend work during the period of notice of resignation or termination of the employment is colloquially known as “garden leave” or “gardening leave.”

Mejila vs. Wringley Philippines, Inc.
G.R. No. 199469/G.R. No. 199505, September 11, 2019

Redundancy; Outsourcing operations not integral to the company and to focus on the core business renders the redundancy whimsical or arbitrary; Burden of proof; The burden of proving bad faith lies with the employee; Procedural due process; Service to DOLE Regional Office; Service to DOLE Field Office fails to satisfy the procedural due process requirement; Garden leave; Garden leave is valid; Garden leave; Garden leave, or the act of directing the employee not to attend work during the period of notice of resignation or termination complies with the procedural due process

Facts:

WPI is a corporation engaged in the manufacturing and marketing of chewing gum. It engaged the services of Mejila, a registered nurse, as an occupational health practitioner for its Antipolo manufacturing facility sometime in April 2002. Her employment status was initially on a contractual basis until she was regularized effective January 1,  2007.

On October 26, 2007, WPI sent a rnernorandum to Mejila informing her that her position has been abolished as a  result of the company’s manpower rationalization program and that her employment will be terminated effective November 26, 2007.

The memorandum stated that Mejila is no longer required to work beginning the same day, October 26, although her salary will be paid until November 26. It also required Mejila to turn over all company properties no later than October 26. WPI granted her separation pay at the rate of 1.5 months every year of service, cash conversion of unused leaves, one-year extension of medical insurance, and pro rata 13^th month pay, New Year pay, and mid-year pay, which shall be released upon return of all properties and completion of the exit clearance process. On the same date, WPI notified the Department of Labor and Employment’s (DOLE) Rizal Field Office of its decision to terminate Mejila and two others due to redundancy.

In the meantime, W/Pl engaged the services of Activcone Health, Inc. to take over the services previously handled by the occupational health practitioners. The abolition of WPI’s in-house clinic services and decision to hire an independent contractor for clinic operations was part of the management’s Headcount Optimization Program designed to improve cost efficiency, considering that clinic management is not an integral part of WPI’s business. Like Mejila. Dr. Marilou L. Fonollera and nurse Soccoro Laarni B. Edurise were also terminated due to redundancy.

Mejila filed a complaint for illegal dismissal against WPI and its officers, Jesselyn Panis, and Michael Paniaqui, who are WPl’,s Factory Director and People Learning and Development Manager, respectively.

LA Ruling:

The Labor Arbiter (LA) ruled thatt Mejila was illegally dismissed and held that WPI failed to comply with the procedural due process requirements, particularly when it sent the notice to DOLE’s Rizal Field Office, instead of the Regional Office.

In addition, the Labor Arbiter found that the outsourcing of clinic operations is more expensive-for WPI, which belies its intention to economize. Accordingly, WPI was ordered to reinstate Mejila and to pay her full backwages, moral damages, exemplary damages, and attorney’s fees.

NLRC Ruling:

On appeal, the National Labor Relations Commission (NLRC) reversed the Labor Arbiter.

The NLRC held that as early as February 2007, WPI management had already deliberated on the feasibility of a Headcount Optimization Program for the purpose of streamlining the organization and increasing productivity. Contrary to the Labor Arbiter’s pronouncement, the NLRC found that the outsourcing of clinic operations actually resulted in an overall cost savings of P500,000.00 for WPI.

The NLRC noted that while the monthly basic income of the outsourced nurses are higher, the gross annual income of the displaced in-house nurses such as Mejila was actually higher because of additional monetary benefits granted by WPI on top of the monthly salary. With respect to the due process issue, the NLRC held that notice to the Rizal Provincial Office is sufficient compliance since it is a satellite office of the Regional Office. 

Mejila elevated the case to the CA on certiorari.

CA Ruling:

The CA afiirmed the NLRC’s finding that Mejila was not illegally dismissed.

The CA ruled that “WPI presented evidence as to the increased productivity and cost efficiency brought about by the Headcount Optimization Program” and that ”the outsourcing of the clinic operations to Activeone Health Inc. enabled WPI to focus more on its core business of gum manufacturing.”

However, the CA held that WPI failed to properly serve the notice of termination to the DOLE Regional Office as required by the Implementing Rules and Regulations of the Labor Code. This is supported by the certification of the Regional Director himself that his office did not receive any notice from WPI.

Thus, the CA awarded nominal damages to Mejila, as well as attorney’s fees pursuant to Article 111 of the Labor Code. After the CA denied their partial motions for reconsideration, both parties filed their respective petitions for review challenging the CA ruling insofar as it was unfavorable to them.

Issue/s:

Whether or not outsourcing operations not integral to the company and to focus on the core business renders the redundancy whimsical or arbitrary

Whether or not the burden of proving bad faith lies with the employee

Whether or not service of notice of redundancy to DOLE Field Office complies with the legal requirement

Whether or not garden leave, or the act of directing the employee not to attend work during the period of notice of resignation or termination complies with the procedural due process

SC Ruling:

The SC denied the petitions and affirmed the Decision of the CA with modification in that the award of attorney’s fees is deleted.

In ruling, the SC states that the Labor Code recognizes redundancy as an authorized cause for the termination of employment. Article 298 (formerly Article 283 ). Redundancy exists where the services of an employee are in excess or what is reasonably demanded by the actual requirements of the enterprise.

The determination that the employee’s services are no longer necessary or sustainable and, therefore, properly terminable is an exercise of business judgment of the employer. The wisdom or soundness of this judgment is not subject to discretionary review of the labor tribunals and the courts, provided there is no violation of law and no showing that it was prompted by an arbitrary or malicious act.

A company cannot simply declare redundancy without basis. It is not enough for a company to merely declare that it has become overmanned, It must produce adequate proof that such is the actual situation to justify the dismissal of the affected employees. for redundancy. The SC held that it considered evidence such as the new staffing pattern, feasibility studies, proposal on the viability of the newly created positions, job description and the approval by the management of the restructuring, among others, as adequate to substantiate a claim for redundancy.

In the present case, WPI substantially proved that its Headcount Optimization Program was a fair exercise of business judgment. The decision to outsource clinic operations can hardly be considered as whimsical or arbitrary. WPI had deliberated on the feasibility of the Headcount Optimization Program as early as February 2007 for the purpose of streamlining the organization and increasing productivity.

WPI’s rationale for outsourcing its clinic operations is reasonable-it wanted to focus on the core business of gum manufacturing, and clinic operations is not an integral part of it. WPI ‘s business projections showed a correlation between an increase in volume and a  decrease in headcount, and its computation of cost savings amounting to P522,713.79 as a  result of the engagement of Activeone has not been adequately rebutted. Mejila’s proposed computation takes into account only the basic monthly salary of the clinic personnel. The average monthly salary of Mejila and her co-nurses is higher than the service fees paid to Activeone when the added benefits of 13th to 15th month pay, holiday pay, cash gift, factory incentives, leave conversions, and allowances are taken into account.

On the other hand, Mejila failed to prove her accusation that WPI acted with ill motive in implementing the redundancy program. The pieces of evidence presented by Mejila to support her allegation were mainly hearsay and speculative at best. On the contrary, WPl’s prior actions showed that it was implementing its Headcount Optimization Program without singling out Mejila. Prior to her termination, WPI had released at least 10 other employees as part of the program.

It must be emphasized that while the company bears the burden of proving that the dismissal of employees on the ground of redundancy is justified, the onus of establishing that the company acted in bad faith lies with the employee making such allegation. This follows the basic precept that bad faith can never be presumed; it must be proved by clear and convincing evidence.

Management cannot be denied the faculty of promoting efficiency and attaining economy by a study of what units are essential for its operation. It has the ultimate determination of whether services should be performed by its personnel or contracted to outside agencies. Contracting out of services is an exercise of business judgment or management prerogative. Mejila’s failure to discharge her burden of proving that WPI ‘s management acted in a malicious or arbitrary manner constrains the SC to apply the policy of non-interference with the employer’s exercise of business judgment.

In implementing a redundancy program, Article 298 requires employers to serve a written notice to both the affected employees and the DOLE at least one month prior to the intended date of termination. Under Book V, Rule XXIII, Section 2 of the Implementing Rules and Regulations of the Labor Code, this procedural requirement is ”deemed complied with upon service of a written notice to the employee and the appropriate Regional Office of the Department at least thirty days before the effectivity of the termination, specifying the ground or grounds for termination.

The practice of the employer directing an employee not to attend work during the period of notice of resignation or termination of the employment is colloquially known as “garden leave” or “gardening leave.” The employee might be given no work or limited duties, or be required to be available during the notice period to, for example, assist with the completion of work or ensure the smooth transition of work to their successor. Otherwise, the employee is given no work and is directed to have no contact with clients or continuing employees. During the period of garden leave, employees continue to be paid their salary and  any other contractual benefits as if they were rendering their services to the employer.

In the United Kingdom (UK), where the practice originated, the garden leave clause has been used as an alternative to post-employment non-competition covenants. The employee remains employed for the period of the leave but is  expected to do no work; he could, then, “stay home and tend the garden.” The provision is typically in place to prevent departing employees from having access to confidential and commercially sensitive information, business contacts, and intellectual property, which can be used by a  new employer. Since the employee remains an “employee,” he remains bound by a  duty of loyalty and, thus, cannot go to work for a compelitor or do anything else to harm the employer. This arrangement provides employers with the protection they need, is fair to employees, and has been generally accepted and enforced by the UK courts. The practice has been adopted by employers in the United States., and their courts have generally upheld garden leave clauses.

In the Philippines, garden leave has been more commonly used in relation to the 30-day notice period for authorized causes of termination. There is no prohibition under our labor laws against a garden leave clause in an employment contract.

Where termination is based on authorized causes under Article 298, substantial compliance is not enough. Since the dismissal is initiated by the employer’s exercise of its management prerogative, strict observance of the proper procedure is required in order to give life to the constitutional protection afforded to labor. The language of the Implementing Rules and Regulations of the Labor Code is clear and does not require any interpretation. It provides that written notice must be served upon “the appropriate Regional Office of the Department at least thirty days before the effectivity of the termination.” In this regard, the Regional Director of DOLE Regional Office IV-A. Atty. Ricardo S. Martinez, Sr., certified that the office did not receive a copy or WPI’s termination notice.

WPI has not pointed to any issuance by the DOLE authorizing the service of the termination notice to the field offices. It appears that WPI merely assumed that this is allowed because certain functions have been devolved to these satellite offices. However, this assumption is unwarranted in the absence of any clear devolution of the authority to receive the notice of terrninatior1. The only thing WPI can palpably point to is the Establishment Termination Report (RKS Form 5) which has a blank section at the header allowing employers to fill in the appropriate regional office, district office or provincial extension unit. The argument, apart from being tenuous, is contradicted by the form itself because it states that it must be accomplished “upon filing of notice of termination.”

The form, therefore, is not the equivalent or substitute for the notice required by law. Thus, regardless of whether DOLE allows the form to be filed with its field offices, it does not change the rule that the notice must be filed with the regional office.

An employer’s failure to comply with the procedural requirements under the Labor Code entitles the dismissed employee to nominal damages. If the dismissal is based on an authorized cause under Article 298 but the employer failed to comply with the notice requirement, the sanction is stiffer compared to termination based on Article 297 because the dismissal was initiated by the employer’s exercise of its management prerogative. After finding that both notices to Mejila and the DOLE were defective, the SC accordingly held that WPI is liable to pay nominal damages in the sum of P50,000.00.